A private company with more than 2,000 employees, or with turnover above £200 million and a balance sheet total above £2 billion, must include a statement of its corporate governance arrangements in its directors’ report. The Wates Principles are the six principle framework most of those companies use to meet that duty, applied on an “apply and explain” basis rather than a box ticking one.

Which companies have to report on corporate governance?

The duty sits in Part 8 of Schedule 7 to the Large and Medium sized Companies and Groups (Accounts and Reports) Regulations 2008, inserted by the Companies (Miscellaneous Reporting) Regulations 2018. Paragraph 23(3) says the qualifying conditions are met in a year in which a company satisfies either or both of these tests:

  • it has more than 2,000 employees; or
  • it has a turnover of more than £200 million and a balance sheet total of more than £2 billion.

Paragraph 24 sets out how the figures are measured. Employees means the average number of people employed by the company under contracts of service, worked out by taking the headcount for each month, adding the monthly totals and dividing by the number of months. Turnover is adjusted proportionately for a financial year that is not 12 months, and the balance sheet total is the aggregate of the assets shown in the balance sheet, so it is a gross figure rather than net assets. The test looks at persons employed by the company itself, so each company in a group has to be checked on its own figures.

Paragraph 22 removes three types of company from the requirement: a company that already has to provide a corporate governance statement (defined in section 472A of the Companies Act 2006 by reference to rules 7.2.1 to 7.2.11 of the FCA’s Disclosure Guidance and Transparency Rules), a community interest company, and a charitable company.

When does the statement first become compulsory?

The FRC’s introduction to the Principles explains that the requirement applies to company reporting for financial years starting on or after 1 January 2019. Paragraph 23 then contains a two year rule that is easy to misread:

  • in a company’s first financial year, the statement is needed if the conditions are met in that year;
  • in any later year, it is needed if the conditions are met in that year and the preceding year, or if they are met in that year and a statement was required for the preceding year;
  • it is also needed if the conditions were met in the preceding year and a statement was required for that preceding year.

The practical result is that an established company does not come into the regime the first time it crosses a threshold, only the second consecutive time, and it stays in for one further year after it drops back below.

What must the statement say?

Paragraph 26(1) requires the directors’ report to state which corporate governance code, if any, the company applied in the financial year, how it applied that code, and, if it departed from the code, the respects in which it did so and its reasons. Paragraph 26(2) covers the company that applies no code: it must explain the reasons for that decision and what arrangements for corporate governance it applied instead. Choosing no code is therefore allowed, but it does not reduce the amount of explaining.

Paragraph 27 adds a publication rule for unquoted companies. The statement must be made available on a website maintained by or on behalf of the company that identifies the company, free of charge and without other restriction, and kept there until the next year’s statement is published or, if none is required, until the end of the next financial year.

What are the Wates Principles?

The Wates Corporate Governance Principles for Large Private Companies were published by the Financial Reporting Council on 10 December 2018. They were developed by a coalition group chaired by James Wates CBE, appointed in January 2018, after the Government asked the FRC to coordinate the work. The FRC took over governance of the Principles on 1 January 2025. There are six principles:

  1. Purpose and leadership: an effective board develops and promotes the purpose of the company and ensures its values, strategy and culture align with it.
  2. Board composition: an effective chair and a balance of skills, backgrounds, experience and knowledge, with the size of the board guided by the scale and complexity of the company.
  3. Director responsibilities: the board and individual directors understand their accountability and responsibilities, and board policies and procedures support effective decision making and independent challenge.
  4. Opportunity and risk: the board promotes long term sustainable success by identifying opportunities to create and preserve value and establishing oversight of risk.
  5. Remuneration: executive remuneration structures aligned to long term sustainable success, taking account of pay and conditions elsewhere in the company.
  6. Stakeholder relationships and engagement: directors foster effective stakeholder relationships aligned to the company’s purpose, with the board overseeing meaningful engagement, including with the workforce, and having regard to stakeholder views when taking decisions.

How is “apply and explain” different from “comply or explain”?

The UK Corporate Governance Code for listed companies contains detailed provisions that a company either complies with or explains departures from. The Wates Principles deliberately do not. Each principle comes with guidance, but the FRC document says the guidance does not need to be reported on in the way listed companies report against Code provisions. Boards are expected to consider each principle in the context of their own company and then explain in their own words how their governance practices achieve it, with a supporting statement showing how policies and processes deliver the desired outcome for each principle.

The Principles do not override or interpret directors’ duties in sections 170 to 177 of the Companies Act 2006. The term “workforce” is wider than employees and can include agency and remote workers, provided the company explains who it has included. A subsidiary whose remuneration or other policies are set by its parent may refer to the parent’s governance statement, but only if that statement explains the subsidiary’s own procedures. Cross references to the strategic report are encouraged rather than repeating material.

How does it fit with the section 172 statement?

Separately from Schedule 7, section 414CZA of the Companies Act 2006 requires the strategic report of a company that does not qualify as medium sized to include a section 172(1) statement describing how the directors have had regard to the factors in section 172(1)(a) to (f). Section 426B requires that statement to be put on a website. Most companies inside the Wates thresholds will also be producing a section 172(1) statement, and the Wates guidance suggests cross referring between the two so that stakeholder engagement is described once. The background to the duty itself is covered in our page on the duty to promote the success of the company.

How widely are the Principles used and what goes wrong?

The FRC’s August 2024 review of 2021/22 statements found that 547 of the 1,815 companies in scope of the Regulations chose to adopt the Wates Principles, more than chose any other option. Its foreword criticised an over reliance on boilerplate text and weak reporting on purpose and leadership.

The FRC’s December 2025 Reporting Insights, its first publication since bringing the Principles in house, found that reporting against Principles One, Two and Five (purpose and leadership, board composition and remuneration) still lacks meaningful insight. It also criticised subsidiaries that describe only the parent company’s board without explaining governance at the entity level, and encouraged companies to focus on actions and decisions taken at board level.

How might this work for a family owned group?

Illustration only. A family owned manufacturing company has always had around 1,700 staff. In the year to 31 December 2025 its monthly headcount averages 2,150 for the first time, and in 2026 it averages 2,300. Turnover is £160 million. Because this is not its first financial year, 2025 does not trigger the statement: the conditions were not met in 2024 and no statement was required for 2024. In 2026 the conditions are met for a second consecutive year, so the 2026 directors’ report needs a statement of corporate governance arrangements, and the company must publish it on its website.

The board decides to adopt the Wates Principles. It describes its purpose, its board (four family directors and two non executive directors), its risk committee, how bonuses are set, and two decisions where workforce feedback changed the outcome. If the average falls back to 1,950 in 2027, the statement is still required for 2027, because the conditions were met and a statement was required in 2026.

What mistakes do companies and their advisers make?

  • Testing the employee threshold on group headcount rather than the company’s own average monthly employees, or on year end headcount.
  • Treating the turnover limb as met on turnover alone. Both the turnover and the £2 billion balance sheet test must be passed for that limb.
  • Missing the two year entry and exit rule in paragraph 23(2).
  • Assuming that no statement is needed if no code is adopted. Paragraph 26(2) still requires an explanation of the reasons and the arrangements applied.
  • Forgetting the website publication requirement for unquoted companies.
  • Copying the Wates guidance into the report as a checklist. The FRC has repeatedly said it wants outcomes and board decisions, not boilerplate.

The statement sits alongside the general duties every director already owes, which are summarised in our guide to directors’ duties under the Companies Act.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.